Tax 1 Unit 1.

Chapter 4

Chapter 4. Accounting Periods, Methods and Reporting

I. Income Tax Schemes
a. Final Income Taxation
b. Capital Gains Taxation
c. Regular Income Taxation

The tax schemes are mutually exclusive. An item of gross income that is subject to tax in
one scheme will not be taxed by other schemes. Similarly, items of income that are
exempted in one scheme are not taxable by other schemes.

II. Classification of Gross Income

a. Gross income subject to final tax
- The recipient income taxpayer receives the income net of taxes. The
payor is the one required by law to remit the tax to the government.
Note: Final taxation is applicable only on certain passive income listed by
the law. Not all items of passive income are subject to final tax.
b. Gross income subject to capital gains tax
- Capital gains tax is imposed on the gain realized on the sale, exchange
and other dispositions of certain capital assets.
Note: Not all capital gains are subject to capital gains tax. Most of them
are subject to regular income tax.
Note: The taxpayer still files capital gains tax returns to report the gain
and pay the tax to the government.
Capital gains taxation applies only to two types of capital assets;
domestic stocks and real property.
c. Gross income subject to regular tax
- Regular income tax is the general rule in income taxation and covers all
other income such as;
1. Active income
2. Other Income such as gains from dealings in properties, not
subject to capital gains tax and other passive income not subject
to final tax.

III. Accounting Period

Calendar year - The calendar accounting period starts from January 1 and ends
December 31. This accounting period is available to both corporate taxpayers and
individual taxpayers.
Fiscal year - A fiscal accounting period is any 12 month period that ends on any day
other than December 31. The fiscal accounting period is available only to corporate
income taxpayers and is not allowed to individual income taxpayers.

Sources: Philippine TAX Code as amended; Income Taxation, Banggawan; R.R. No. 2-40, Sec 36; CPA
Reviewer in Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR
Reviewer, The Tax Reviewer 2021e, Soriano; Income Taxation, Dimaampao
Tax 1 Unit 1. Chapter 4

Instances of Short Accounting Period

1. Newly commenced business
2. Dissolution of business
3. Change of accounting period by corporate taxpayers
4. Death of the taxpayer
5. Termination of the accounting period of the taxpayer by the Commissioner of
Internal Revenue

IV. Accounting Methods

-Refers to the method on how to report a certain income for it to be taxable for the
current period or for future periods.
1. Accrual Basis - income is recognized when earned regardless of when received
and expenses are recognized when incurred regardless when paid.
2. Cash Basis - income is recognized when received, regardless of when earned
and expenses are recognized when paid regardless when it was actually
incurred.
For tax purposes, accrual and cash basis are both acceptable accounting methods to be
applied, however, the following rules shall be observed in using these methods:
1. Advanced income is taxable upon receipt for sale of services and rental of properties.
This rule is applicable only on the sale of services not on goods.
Reason: Lifeblood Doctrine and Ability to Pay Theory.
2. Prepaid expenses are not deductible in the period paid but rather deductible in the
period it was used, expired or consumed.
3. If an item or income or expense requires to be treated differently by an existing law or
regulations in taxation.
3. Deferred payment method - is used when a non-interest bearing note is
received as consideration in a sale. The gross income is computed based on the
present value of a note from the sale. The discount (interest) on the note is
amortized and reported as interest income over the period of the note.
4. Installment method - gross income is recognized and reported in proportion to
the collection from sale via installment basis.
Installment method is available to the following taxpayers:
a. Dealers of personal property on the sale of properties they regularly sell.
b. Dealers of real properties, only if their initial payment does not exceed
25% of the selling price
c. Casual sale of non-dealers in property, real or personal, when their selling
price exceeds P1,000 and their initial payment does not exceed 25% of
the selling price.
5. Percentage of completion on construction projects - the estimated gross
income earned will be computed based on the percentage of completion by the
construction project.

Sources: Philippine TAX Code as amended; Income Taxation, Banggawan; R.R. No. 2-40, Sec 36; CPA
Reviewer in Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR
Reviewer, The Tax Reviewer 2021e, Soriano; Income Taxation, Dimaampao
Tax 1 Unit 1. Chapter 4

6. Outright or spread method on leasehold improvements - method of

recognizing income from leasehold improvements built by the lessee but still
usable on the part of the lessor upon end or termination of the contract of lease.
7. Crop year basis - farming income is recognized as the difference between the
proceeds of harvest and expenses of a particular crop harvested. The expenses
are recognized and deducted one time upon the proceeds from harvesting the
crop.
V. Information Returns
Types of Returns to the Government
1. Income tax returns - provide details of the taxpayer’s income, expense, tax due,
tax credit and tax still due the government.
2. Withholding tax returns - provide reports of income payments subjected to
withholding tax by the taxpayer-withholding agent.
3. Information returns - do not involve any payment or withholding of tax but are
essential to the government in its tax mapping efforts and in its evaluation of tax
compliance.
The non-filing of Income tax returns, withholding tax returns, or information returns is
subject to penalties, fines and or imprisonment.

VI. Mode of Filing and Paying

1. Manual Filing - the traditional system of filing tax returns paper form in printed
format available to the BIR offices are filled up manually by the taxpayer. Under
our existing laws, these manually completed returns shall be filed in the following
venue in descending order of priority, within the revenue district office where the
taxpayer or the business is registered or required to register:
a. An authorized agent bank (AAB)
b. Revenue Collection Officer
c. Duly authorized city or municipal treasurer if there is no BIR office.
2. E-BIR Forms - a computer application that can be downloaded in the BIR
website and updated regularly for changes in the prescribed BIR forms
appropriate for tax payments. Taxpayers can fill up the various forms through an
electronic spreadsheet in the program. The spreadsheet can then be printed and
filed for payment in AABs. It is the filing mode encouraged by the BIR, especially
for returns where no payment of tax is due. The form will simply be filed online.
3. Electronic Filing and Payment System (EFPS) - a paperless tax filing system
developed and maintained by the BIR. Taxpayers file tax returns including
attachments required in electronic format and pay taxes through mobile banking
and the internet.

VII. EFPS Filers

The following are required to file and pay taxes using EFPS:
1. Large Taxpayers
2. Top 20, 000 private corporations
Sources: Philippine TAX Code as amended; Income Taxation, Banggawan; R.R. No. 2-40, Sec 36; CPA
Reviewer in Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR
Reviewer, The Tax Reviewer 2021e, Soriano; Income Taxation, Dimaampao
Tax 1 Unit 1. Chapter 4

3. Top 5, 000 individual taxpayers

4. Taxpayers with complete computerized accounting system
5. Insurance companies and stockbrokers
6. Taxpayers wishing to enter contact with the government (government bidders)
7. Corporations with paid up capital of P10, 000, 000
8. PEZA- registered entities and those registered on other Economic Zones
9. National Government Agencies for withholding VAT and business taxes
10. Taxpayers included in the Taxpayers Account Management Program (TAMP)
11. Accredited importers, including prospective importers securing Importers Clearance
Certificate (BIR- ICC) and Customs brokers Clearance (BIR- BCC)

VIII. Penalties for late filing and payment of taxes.

1. Surcharge - A civil penalty imposed by law as an addition to the basic tax required to be
paid. A surcharge added to the main tax is subjected to interest
a. 25% of the amount due shall be imposed in the following:
- Failure to file any return and pay the tax due thereon on the date
prescribed;
- Wrong venue, unless otherwise authorized by the Commissioner, filing a
return with an internal revenue officer other than those with whom the
return is required to be filed;
- Failure to pay the deficiency tax within the time prescribed for its payment
in the notice of assessment ; or
- Failure to pay the full or part of the amount of tax shown on any return
required to be filed, or the full amount of tax due for which no return is
required to be filed, on or before the date required for its payment
b. 50% penalty in case of the following:
- Willful neglect to file a return within the period prescribed; or
Note: If the taxpayer voluntarily files the return, without notice from the
BIR, only a 25% surcharge shall be imposed for late filing and late
payment of the tax. But if the taxpayer files the return only after prior
notice in writing from the BIR, then the 50% surcharge will be imposed.
- False or Fraudulent return willfully made
Note: There is a prima-facie evidence of false or fraudulent return when
there is substantial underdeclaration of Taxable sales, receipts or income
in an amount exceeding 30% of that declared per return, or claim of
deductions in an amount exceeding 30% of actual deductions.

2. Interest - Double of the legal interest rate for loans or forbearance of any money in the
absence of any express stipulation.

Period Applicable Interest Type and Rate

For the period up to December 31, 2017 Deficiency and/or delinquency interest at
Sources: Philippine TAX Code as amended; Income Taxation, Banggawan; R.R. No. 2-40, Sec 36; CPA
Reviewer in Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR
Reviewer, The Tax Reviewer 2021e, Soriano; Income Taxation, Dimaampao
Tax 1 Unit 1. Chapter 4

20%

For the period January 1, 2018, until full Deficiency and/or delinquency interest at
payment of the tax liability 12%

Classes of Interest:
a. Deficiency Interest - Imposed on any deficiency in the tax due, which shall be
assessed and collected from the date prescribed for its payment until the full
payment thereof, or upon issuance of a notice and demand by the Commissioner
of Internal Revenue, which comes earlier.
b. Delinquency Interest - imposed in case of failure to pay:
- The amount of tax due on any return required to be filed;
- The amount of tax due for which no return is required; or
- A deficiency tax, surcharge or interest thereon on the due date appearing
in the notice and demand of the CIR, there shall be assessed and
collected on the unpaid amount shall be subject to the interest rate above
until the amount is fully paid, which interest shall form part of the tax.
NOTE: Before passage of TRAIN law, delinquency and deficiency interest may be
imposed simultaneously. However, after the effectivity of TRAIN LAW, in no case shall
the deficiency and delinquency interest be simultaneously imposed.

Sources: Philippine TAX Code as amended; Income Taxation, Banggawan; R.R. No. 2-40, Sec 36; CPA
Reviewer in Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR
Reviewer, The Tax Reviewer 2021e, Soriano; Income Taxation, Dimaampao